As noted in Chapter 2, Adam Smith’s,
An Inquiry into the Nature and Causes of theWealth of Nations
, is considered the birth of modern economics. It is clear from the title thatSmith was interested in analyzing the creation of wealth and prosperity in nations. Hisanalysis led him to the ‘invisible hand’ of the market rather than the ‘visible foot’ of government actions. He did recognize a role for government, but that role was very limitedand restricted to providing the framework for individuals to act within the market.
Since Adam Smith, economists have always been concerned with economic growth.Besides analyzing the mechanisms to allocate scarce resources, economists have also provided theories of growth. In much of the modern literature in what is now called growththeory, mathematical models have been developed to explain how economies grow. The goalin these models is to find an optimal solution given a set of constraints. In this mathematicalmix one finds what is called a
variable, i.e., an economic variable that can bemanipulated by some economic planner. In fact the very concept of modeling growth for many decades consisted of finding the right knob to turn, so to speak, on the economicmechanism. This implies that a planner or a policy maker can and should make decisionsregarding what variables to manipulate and by how much.Models to explain economic growth and development were primarily developed postWorld War II. Before World War II, government intervention in the economy to promotegrowth was not considered much, while after World War II the very concept of economicgrowth implied government action. Since then the accepted notion is that growth theorymeans government action. The prevailing thinking in the literature is that an economy, particularly a country, without guidance from a planner would not grow or develop in anadequate manner. The impediments keeping the economy from growing on its own are called‘market failures.’ These failures provide the theoretical justification for governmentintervention and planning. On the other hand, some economists have pointed out that wecannot ignore government failures in economic development.
Krueger (1990) for example.